Chapter 13 Efficient Markets and Behavioral Finance 351
bre44380_ch13_327-354.indd 351 09/11/15 07:55 AM
Select problems are available in McGraw-Hill’s Connect.
Please see the preface for more information.BASIC
- Market efficiency Which (if any) of these statements are true? Stock prices appear to
behave as though successive values (a) are random numbers, (b) follow regular cycles, (c) dif-
fer by a random number. - Market efficiency Supply the missing words:
“There are three forms of the efficient-market hypothesis. Tests of randomness in stock
returns provide evidence for the form of the hypothesis. Tests of stock price reaction
to well-publicized news provide evidence for the form, and tests of the performance of
professionally managed funds provide evidence for the form. Market efficiency results
from competition between investors. Many investors search for new information about the
company’s business that would help them to value the stock more accurately. Such research
helps to ensure that prices reflect all available information; in other words, it helps to keep
the market efficient in the form. Other investors study past stock prices for recurrent
patterns that would allow them to make superior profits. Such research helps to ensure that
prices reflect all the information contained in past stock prices; in other words, it helps to
keep the market efficient in the for m.”- Market efficiency True or false? The efficient-market hypothesis assumes that
a. There are no taxes.
b. There is perfect foresight.
c. Successive price changes are independent.
d. Investors are irrational.
e. There are no transaction costs.
f. Forecasts are unbiased.
- Market efficiency True or false?
a. Financing decisions are less easily reversed than investment decisions.
b. Tests have shown that there is almost perfect negative correlation between successive
price changes.
c. The semistrong form of the efficient-market hypothesis states that prices reflect all pub-
licly available information.
d. In efficient markets the expected return on each stock is the same.
- Abnormal returns Analysis of 60 monthly rates of return on United Futon common stock
indicates a beta of 1.45 and an alpha of –.2% per month. A month later, the market is up by
5%, and United Futon is up by 6%. What is Futon’s abnormal rate of return? - Behavioral finance True or false?
a. Most managers tend to be overconfident.
b. Psychologists have found that, once people have suffered a loss, they are more relaxed
about the possibility of incurring further losses.
● ● ● ● ●PROBLEM
SETSBubbles are discussed in:
M. Brunnermeier, Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analy-
sis, and Herding (Oxford: Oxford University Press, 2001).
A. Scherbina, “Asset Price Bubbles: A Selective Survey,” IMF Working Paper 13/45, 2013.
R. J. Shiller, Irrational Exuberance, 2nd ed. (Princeton, NJ: Princeton University Press, 2005).